Company Profile:

China Lesso is a leading large-scale building materials and home furnishings industry group in Chinese mainland, with a market share of approximately 20%. Its product portfolio spans piping systems, sanitary ware, integrated kitchens, profiles and doors & windows, decorative panels, fire safety equipment, and sanitary materials. These products are widely used in home renovation, civil construction, municipal water supply and drainage, energy management, power and telecommunications, gas, fire protection, environmental protection, and agriculture.

The Company operates 30 production bases across 19 regions in China and overseas. Its key clients include independent distributors, property developers, as well as public utilities and municipal departments such as water supply, electricity, telecommunications, and gas companies. As of December 31, 2024, the company had 2,978 exclusive tier-1 distributors in Chinese mainland.

Performance Weakened by Industry Headwinds

In 2024, the Company's revenue and profit attributable to shareholders declined by 12.45% and 28.9% yoy respectively to RMB 27.026 billion and RMB 1.684 billion. Basic earnings per share stood at RMB 0.55, with a dividend payout of HKD 0.20 per share (same as 2023), and the dividend payout ratio increased from 23.7% to 34.1%.

During the period, China's economy continued to decelerate, while the real estate sector remained in a bottoming phase. The building materials and piping industries faced dual challenges of weakening demand and overcapacity, weighing on product demand.

By business segment, the Company recorded revenues of RMB 22.819 billion, RMB 2.271 billion, and RMB 1.936 billion from plastic piping, building materials & home furnishings, and other businesses respectively, representing yoy declines of -7.2%, -20.0%, and -43.8%. These segments accounted for 84.4%, 8.4%, and 7.2% of total revenue, with changes of +4.8, -0.8, and -4 ppts compared to 2023, respectively.

A further breakdown of other businesses shows that the environmental protection, supply chain service platform, and photovoltaic segments recorded revenues of RMB 277 million, RMB 930 million, and RMB 223 million, respectively, representing yoy declines of -28.4%, -38.6%, and -79.0%. These segments accounted for 1.0%, 3.4%, and 0.8% of total revenue, down 0.57, 2.76, and 3.5 ppts yoy, respectively. The decline in revenue from the supply chain service platform was primarily due to its spin-off and separate listing in May 2024, while the performance of the photovoltaic segment was severely impacted by a downturn in the PV cycle.

Core Plastic Piping Business Remains Stable with Marginal Gross Margin Gain

Sales volume of plastic piping fell -6.2% yoy, and average selling price dropped 1.1% to RMB 9,191/ton. However, stable low raw material costs and strong operational efficiency lifted gross margin by +0.2 ppts yoy to 28.7%.

The stable profitability of the core business, coupled with a decline in the proportion of low-margin businesses, contributed to a slight increase in overall gross margin to 27.0% (+0.7 ppts yoy).

By geography, overseas revenue saw a smaller decline (-10.5% yoy) but with a sharper gross margin drop (24.98%, -2.02 ppts yoy), while domestic revenue declined more (-12.63% yoy) yet gross margin improved (27.28%, +1.07 ppts). The South China region accounted for the largest share of revenue at 45.9%, with regions outside South China at 45.6% and overseas at around 8.5%.

Increased Expense Ratio, Lower Impairment

In 2024, Lesso's operating expense ratio rose to 19.3%, up +1.2 ppts yoy, mainly due to reduced revenue scale weakening the ability to dilute fixed expenses. The selling, administrative, and R&D expense ratios were 5.9%, 6.0%, and 3.9% respectively, representing yoy changes of +0.83, +0.62, and -0.15 ppts. The finance expense ratio declined slightly to 3.5%, down 0.08 ppts yoy, primarily due to a reduction in total debt (down RMB 1.05 billion yoy) and an optimized debt structure.

The primary reasons for profit decline were an RMB 828 million drop in gross profit and a RMB 220 million reduction in the share of associates` profits. This was partially offset by a 36.2% yoy decrease in impairment provisions (RMB 547 million).

Advancing Product Diversification and Overseas Expansion

Amidst a dynamic market, Lesso actively expanded into diverse downstream application areas, achieving breakthroughs with the launch of polyethylene (PE) piping and fittings for nuclear power plants. It also focused on high-growth segments such as hydrogen and oil transportation pipelines, and agriculture-specific pipes, to increase market share.

The Company is also optimizing its customer mix and deepening strategic partnerships with government departments and leading state-owned infrastructure enterprises. Through active participation in national and municipal engineering and renovation projects, the company continues to reinforce its market leadership.

Internationally, Lesso is prioritizing development in Southeast Asia, Africa, and North America. It has established production bases in Indonesia, Thailand, Malaysia, Cambodia, Vietnam, Africa, and the U.S., with additional bases under development in the Philippines and Bangladesh. At the same time, it is accelerating the build-out of its warehousing and logistics network across Southeast Asia. We believe that the relatively low urbanization rates in these regions like Southeast Asia and Africa present significant growth opportunities for Lesso's overseas business, with profitability expected to benefit from economies of scale.

Investment Thesis

While the domestic real estate market remains sluggish, infrastructure is expected to benefit from proactive fiscal policy and rapid deployment of debt-swapping funds. Recently, the Chinese government has accelerated the construction of water conservancy projects and provided subsidies for urban underground pipe network infrastructure, which will benefit piping materials companies.

We expected diluted EPS of the Company to RMB 0.65, 0.73 for 2025/2026. And we accordingly gave the target price to HKD 4.85, respectively 7/6.2 x P/E，0.6/0.5 x P/B for 2025/2026. "Accumulate" rating. (Closing price as at 24 April)

Financials

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